"The middle of the road is all of the usable surface. The extremes, right or left, are in the gutters." Dwight D. Eisenhower

Sunday, December 23, 2012

How did the Republicans Party's bedrock fiscal principle change from balanced budgets to tax cuts? Binyamin Applebaum tells the story in The New York Times.

“Republicans used to be interested in not running continual rivers of red ink,” said former Representative William Frenzel, a Minnesota Republican who as the ranking member of the House Budget Committee in 1990 helped to negotiate the deficit deal. “If that meant raising taxes a little bit, we always raised taxes a little bit. But nowadays taxes are like leprosy and they can’t be used for anything, and so Republicans have denied themselves any bargaining power.”

The Republican Party’s embrace of tax cuts is often traced to the 1970s, when conservative thinkers began to argue that cuts were not just politically advantageous but also fiscally responsible. The economist Arthur Laffer advanced the theory that cuts could even be self-financing, because they could generate enough economic activity to increase revenue. Others said that cutting taxes would force the government to cut spending too, an idea colorfully described as “starving the beast.”

The notion that tax cuts for the wealthy grow the economy ("the rising tide floats all boats") has become part of Republican orthodoxy despite an utter lack of empirical evidence for its validity. Earlier this year the Congressional Research Service released a study illustrating the lack of evidence for this theory.

The results of the analysis suggest that changes over the past 65 years in the top marginal tax rate and the top capital gains tax rate do not appear correlated with economic growth. The reduction in the top tax rates appears to be uncorrelated with saving, investment, and productivity growth. The top tax rates appear to have little or no relation to the size of the economic pie.However, the top tax rate reductions appear to be associated with the increasing concentration of income at the top of the income distribution. As measured by IRS data, the share of income accruing to the top 0.1% of U.S. families increased from 4.2% in 1945 to 12.3% by 2007 before falling to 9.2% due to the 2007-2009 recession. At the same time, the average tax rate paid by the top 0.1% fell from over 50% in 1945 to about 25% in 2009. Tax policy could have a relation to how the economic pie is sliced—lower top tax rates may be associated with greater income disparities.

So the "rising tide" of tax cuts for the wealthy floats their yachts quite a bit better than the smaller craft of lower and middle income earners.

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